Corporate Social Responsibility a Role in Government Policy and Regulation

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RESEARCH REPORT 16

CORPORATE SOCIAL RESPONSIBILITY

A ROLE IN GOVERNMENT POLICY

AND REGULATION?

Constantina Bichta


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The University of Bath School of Management

is one of the oldest established management schools in Britain.

It enjoys an international reputation for the quality of its teaching

and research. Its mission is to offer a balanced portfolio of

undergraduate, postgraduate and post-experience programmes,

research and external activities, which provide a quality of

intellectual life for those involved in keeping with the best

traditions of British universities.


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A ROLE IN GOVERNMENT POLICY

AND REGULATION?

Constantina Bichta

Desktop published byJan Marchant

The University of Bath All rights reserved

ISBN


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Centre for the study of Regulated Industries (CRI)

The CRI is a research centre of the University of Bath School of Management. The CRI

was founded in 1991 as part of the Chartered Institute of Public Finance and

Accountancy (CIPFA). It transferred to the University of Bath School of Management in

1998. It is situated on the 8th

floor of Wessex House (North), adjacent to West car park.

The CRI is an interdisciplinary research centre investigating how regulation and

competition are working in practice, both in the UK and abroad. It is independent and

politically neutral. It aims to produce authoritative, practical contributions to regulatory

policy and debate, which are put into the public domain. The CRI focuses on

comparative analyses across the regulated industries. CRI activities and outputs include:

x Regulatory statistics, information and analysisx Discussion papers and Occasional papersx Regulatory Briefs, Reviews and International seriesx Research Reports and Technical papersx Seminars, courses and conferences

Direct links with regulated industries, the regulators, the academic community and otherinterested parties are an important feature of the work of the CRI. The CRI is non-profit

making. Its activities are supported by a wide range of sponsors.

i BAAi CIPFAi Department of Trade and Industryi Environment AgencyiNational Audit OfficeiNERAiNational Grid Transco

iNetwork Raili OFWATi RSM Robson Rhodesi Royal Maili Thames Wateri United Utilitiesi Wessex Water

Further information about the work of the CRI can be obtained from:-

Peter Vass, Director-CRI, School of Management, University of Bath, Bath, BA2 7AY

orCRI Administrator, Jan Marchant, Tel: 01225 383197, Fax: 01225 383221,

e-mail: [email protected]

and from the CRIs web site, which includes events and the publications list.http://www.bath.ac.uk/cri/


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PREFACE

The CRI is pleased to publish Research Report 16 on Corporate Social Responsibility - A

Role in Government Policy and Regulation? by Constantina Bichta. Constantina was a

Research Officer at the CRI until June 2003.

Understanding the potential role of CSR in companies is important to the design of

regulation. At one level it interfaces with ideas of self-regulation and co-regulation, and at

another it challenges the basis of the modern liberal market economy. Personal and moral

responsibilities of directors and employees have also to be considered alongside the role of

the corporation in meeting the legitimate expectations of its investors and shareholders.

Corporate social responsibility can clearly be seen to be a good thing. Nevertheless,

Governments have to take overall responsibility for ensuring that conduct failures - whether

market or non-market failures - are regulated appropriately, taking account of each of the

three pillars of sustainable development: the economic, social and environmental pillars.

CSR may have a role to play as one of the instruments of, or surrogates for, regulatorypolicy, but that depends not only on its theoretical potential, but whether that potential can be

demonstrated in practice by companies. We hope that this research makes a contribution to

that debate.

The CRI would welcome comments on the report. Comments should be addressed to:

Peter Vass

Director CRI

School of Management

University of Bath

Bath, BA2 7AY

The CRI publishes work on regulation by a wide variety of authors, covering a range of

regulatory topics and disciplines, in its International, Occasional and Technical Paper series.

The purpose is to promote better understanding and debate about the regulatory framework

and the processes of decision making and accountability. Enquiries or manuscripts to be

considered for publication should be addressed as above.

The views of authors are their own, and do not necessarily represent those of the CRI.

Peter Vass

Director, CRI

September 2003


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CONTENTS

Page

1 Introduction 1

2 Corporate social responsibility (CSR) definition 7Operational definition of CSR

compliance plus, best practice and cost-benefit analysis

8

The role of government 9

3 The academic view theoretical debates 13The development of corporate social responsibility 13

The classical view of corporate social responsibility 15

The new meaning of corporate social responsibility

the theory of modern corporation

17

Contrasting models of the corporation a schematic overview

26

Business ethics 27

4 The political view proposals and policies 31Corporate law and governance in Britain

a historical review

31

Current reforms

company law review (1998-2001)

40

Current political views on CSR 44Two prevailing models of corporate social responsibility 48

5 The regulated industries 51Introduction 51

The legal framework for UK regulated industries 52

CSR activities in UK regulated industries 54

The regulated companies 59

The water companies 62

The electricity companies 67The rail network operator 72

The telephone companies 75

The postal services operator 80

6 Conclusions 85The practical meaning and role of CSR for the

UK regulated companies

85

The impact of CSR practices on regulatory policy 87

Final remarks 90


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CONSTANTINA BICHTA

Dr Constantina Bichta, Research Officer, Centre for the study of Regulated

Industries (CRI), University of Bath School of Management

1

1 INTRODUCTION

The important thing for business and society at large to understand is thelimit to voluntary action, which is the point where government need tointervene. If we are to live within the earths capacity and share its resourcesequitably, economies must be transformed. That cannot be done by businessalone1

This paper sets out to describe the role of Corporate Social Responsibility (CSR) ingovernment policy and examine its relevance to a particular sector, the regulated utilities.Current theoretical and political debates and activities conducted at the national andinternational level, suggest a widespread interest shared by government, industry, civilsociety and non-governmental organisations (NGOs) regarding the role of government and

business for the natural environment, social development and social inclusion.

Ten years after the 1992 Rio earth summit, the world summit on sustainable development(WSSD) was held in Johannesburg (26 August 4 September 2002) to review any progressmade since Rio and begin to tackle the global issues of environment and development. Theworlds governments, however, were unable to agree on a binding legal framework on theenvironmental behaviour of global corporations, despite the calls for government action tohold corporations accountable for their activities.2 Instead, government representatives havesettled for purely voluntary industry actions ie, the global compact and type II partnershipagreements.3 Corporate accountability and governance issues also were brought to theattention of the summit delegates, as Friends of the Earth called for a legally bindinginternational framework on corporate accountability and liability.

In the UK, the battle between voluntarism and compulsion is at a critical stage (Cowe, Porritt,2002). The government has appointed a minister for corporate social responsibility, but at themoment the government acts as an enabler of business productivity and innovation. Socialand environmental policy issues are tackled through the setting of minimum legal standards,the use of a light touch legislation regime such as the Pensions Act 1995 and proposals forreforming the British company law ie, directors to act in the interests of the companysshareholders but also take into account the wider interests of customers, employees,suppliers, impact on the local community and the natural environment; annual reports toinclude stakeholder relations, environmental and community impact. The corporateresponsibility coalition (CORE) however, has brought together a broad range of NGOs and ithas raised the stakes with Linda Perhams bill calling for compulsory social and

environmental reporting by companies.

1 Cowe R and Porritt J (2002), Governments Business Enabling Corporate Sustainability, Forum for theFuture, p3.2 Friends of the Earth (2002), Towards Binding Corporate Accountability, Briefing.3 Global contact is an international initiative launched by the UN on 26 July 2000. It is structured around nine

principles in the areas of human rights, labour and the environment that companies, NGOs, and other civilsociety actors may adopt to improve their corporate citizenship ie, corporate responsibility, sustainable growth,and triple bottom line. The initiative is purely voluntary, it does not enforce the behaviour or actions ofcompanies nor policies them. The rationale of the initiative is that voluntary initiatives and regulatory systemscomplement each other and, when combined, provide powerful impetus in encouraging the wide adoption ofresponsible corporate citizenship. The global contact initiative invites companies to integrate the nine

principles into their core management strategy and decision-making. For more information visit the globalcontact official website: www.unglobalcompact.org.


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In such a political environment, industry bodies like the Business in the Community(BitC,UK) anxiously work to improve the impact of their members on local communities. 4During last year, BitC has undertaken two particular initiatives to help members towardsimproving their social performance. These initiatives comprise a corporate responsibilityindex and the corporate impact reporting initiative. The former is a benchmark tool that

provides companies with a systematic process through which they can compare theirmanagement process and performance against others in their sector. By doing so, companiescan improve performance amongst their peers. The latter, in essence, is a framework forcompanies to measure and report on responsible business practices in the areas ofmarketplace, environment, workplace, community and human rights. Both schemes wereintroduced on a purely voluntary basis.5

In the academic circles, some of Europes leading business schools have teamed up withmore than sixty multinationals to launch the European academy of business in society. In itsown words, the academy was created as a response to calls from the public, as well as frommanagers, to better integrate the social responsibility aspect into business activities and has

a mission to drive CSR into the mainstream of business practice. For the mission to beaccomplished, the academy strives to undertake the following activities:

x to integrate the changing role of business in society into the core of business education;x to deliver interdisciplinary research on CSR and create a global research bank on the role

of business in society;

x to become Europes training gateway to best-in-class training practices and learningresources for businesses and corporate academies.6

All the above activities testify the growing interest amongst politicians, industry andacademics around the role of government and business in corporate social responsibility and

performance. But do we beg the question of CSR in government policy all of a sudden?What the situation has been to date and what the situation could be if government adopts anactive role in corporate social responsibility and performance?

To attempt to answer the first question, it is fair to argue that the role of CSR in governmentpolicy is not a new issue. At different periods of the industrial societys history, socialmovements have questioned business social responsibility and governments have respondedwith legal measures. The scientific announcements regarding ozone depletion aroused publicconcern for the natural environment in the early nineties and since the mid ninetiescompanies have become more and more questionable for human rights and labourrelationships in third world countries. Sustainable development, triple bottom line reportingand innovative techniques supporting clean and renewable sources of energy are terms thatindustry is puzzled with on daily basis.7 In this climate, the United Nations and governmentsare developing frameworks to help companies improve their corporate citizenship andresponsibility. Amongst these, the global compact, the universal declaration of humanrights, the international labour organisations (ILO) declaration on fundamental principlesand rights at work and the Rio declaration on environment and development are just a few

4 www.bitc.org.uk.5 BitC (2002), Improving and Communicating Corporate Responsibility.6 The academy is part of the wider European Business Campaign on Corporate Social Responsibility, led by

CSR Europe, the Copenhagen Centre and the Academy partners, which is an ongoing initiative until 2005 withthe aim to raise awareness and engage business people on the topic of CSR.7 Reporting of social, economic and environmental issues.


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examples. These guidelines, developed to help companies to improve their performance,raise however, two important questions: First, they do not provide a legal binding frameworkfor industry to abide by. It is left to industry to adopt them if it wishes to be a better citizenof the world. Secondly, they raise serious questions for increased competitiveness,

particularly for multinationals (who operate at different countries), when they are not

unilaterally enforced at the national and local level.

Consequently, the two later points beg another question of research interest: what role couldgovernment play in CSR? At the closing stages of the WSSD, it became clear thatgovernment and industry found it difficult to agree on common duties and objectivesfavouring the environment and development. To this end, one may also add the main

purpose and function of business in society, which to date has been to increase profitabilityfor shareholders.

Voluntary industry activities are not a good enough response either to overcomeenvironmental problems ie, depletion of scarce resources or tackle problems of development

and social inclusion ie, equal pay, working conditions. As the industry admitted at the end ofthe WSSD, it will restrain itself from committing to high technological investment onrenewable energy and heat-power combustion unless the regulatory framework eitherrequires it or plays the role of a subordinate.8

It is the objective of this research report to explore the role of CSR in government policy inthe context of the regulated industries. But first, let us introduce the notion of CSR.

The notion of corporate social responsibility (CSR) and its discourse

The notion of corporate social responsibility (CSR) is not new in our society. It was born

when corporations were born and societies to accommodate them. The soul of corporatesocial responsibility is what the French philosopher Rousseau understood to be the socialcontract between business and society. Rousseau conceptualised the relationship between

business and society as being a symbiosis. The Greek word symbiosis means the co-living and co-existence of two parties in a mutually advantageous relationship. Thus, thesocial contract understands men (social members) as being able to act freely in a civil societythat is united by a general will or volonte generale: The social contract that brings societyinto being is a pledge, and the society remains in being as a pledged good.9

The social contract signifies the relationship between society and business. Business hoststheir operations within society and in return society expects business to show responsibilityfor aspects of its operations. According to the contract, society recognises organisations asagents, particularly in the eyes of the law, and authorises them to use land, natural resourcesand offer employment. From the business point of view, they improve the quality of life of asociety. One can take the argument of the social contract further by adding to it that businessis socially, morally and politically bounded to improve the quality of life of society: they

8 In its own words, industry requires a clear, equitable and predictable decision-making framework in which tomake long term investment and dedications of capitalinvestment in countries where regulation is lax wouldput such investments at risk. Therefore, building and strengthening capacity in international, national and local

governments to develop, implement enforce the regulatory framework may be priority for government atwww.johannesburgsummit.org, Key Business Messages.9 Jean-Jacques Rousseau, The New Encyclopaedia Britannica, Chicago, Vol 26, pp938-942.
http://www.johannesburgsummit.org/http://www.johannesburgsummit.org/


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are expected to enhance the life of consumers and workers, to promote justice by avoidingdeception or fraud, respect their workers and avoid harming any other social groups. 10

It is, however, the manner in which the social contract has been conducted, particularly onbehalf of corporations during the past a hundred years, that makes the issue of corporate

social responsibility so prominent and important nowadays. It may be that the reason behindthe misconduct of the social contract is the different understanding and explanationsdeveloped around the notion of CSR. The social contract is just one plausible explanationof what is CSR. Many competing arguments that justify the nature and scope of CSR have

been developed over the years, all of which have resulted in offering different discourses ofthe notion.11

The classical view of Adam Smith of perfect markets and the invisible hand have been thecore perception of business responsibilities for the past three hundred years. In the earlytwentieth century, the social responsibility of business was tied up with market performance.Oliver Sheldon, encouraged management to take the initiative in raising both ethical

standards and justice in society through the ethic of economising.12

By doing so, businessprovides wealth in society and increases its standard of living whilst retaining a satisfactorylevel of profit. Not long ago, the social responsibility of business was understood to be the

promotion of the exclusive interests of a firms shareholders, according to Milton Friedmansadvocates.

During the 1970s, most social issues became public policy matters and legislation was passedto address health and safety at work, environmental protection and consumer protectionrights. The public policy approach provided a legitimacy for socially responsible actions on

behalf of management, as government, acting on behalf of its citizens, had a legitimate rightto provide guidelines for managers and shape corporate behaviour to correspond with societal

expectations. The public policy approach contended that the social responsibility of businessin not only to perform well in the marketplace and meet its economic objectives but also tofollow the directives of society at large, as expressed in and through the public policy

process.13 It was therefore argued that the public policy process and marketplace are bothsources or guidelines for managerial behaviour.

In contrast with public policy arguments, other scholars tried to distinguish between CSR andcorporate social responsiveness by arguing that the latter refers to the capacity of anorganisation to respond to social pressures. Social responsiveness describes the act ofresponding to social expectations and consequently, corporate social responsivenesssupporters will look for mechanisms, procedures, arrangements and patterns of behaviour thatdemonstrate the capabilities of an organisation to responding to social pressures (Buchholz,1993). Both approaches however, public policy and social responsiveness, have beencriticised on the basis of ignoring the deeper values involved in CSR that is failure ofadvancing an understanding of the normative dimension related to corporate social behaviour(Buchholz, 1993).

10 Bichta C (2000), The Key Determinants of Environmental Performance - Case studies from thechemical/fertiliser and metal sectors, PhD Thesis, School of Management, University of Bath.11 Bichta C (2002), Corporate Socially Responsible (CSR) Practices in the Context of Greek Industry, CorporateSocial Responsibility and Environmental Management Journal, (forthcoming).12

That is to economise the use of resources and combine resources efficiently so that business can earn profitsto continue operability and expand into new markets.13 Buchholz R (1993), Principles of Environmental Management-The Greening of business, Prentice Hall, USA.


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In recent years, CSR has been linked with sustainable development. The sustainabledevelopment position holds that business has a moral responsibility to insure that its activities

be ecologically sustainable. Business remains free to pursue profits within the rules of thegame but the rules must be changed to include the obligation to leave natural ecosystems noworse off in the process. The sustainable development model seeks to combine the natural

constraints established by ecological laws with minimal moral constraints placed uponbusiness activity. Accordingly, the World Commission on Environment and Developmentdefines sustainable development as development that meets the needs of the present withoutcompromising the ability of future generations to meet their own needs. Contemporary CSRaccept this definition, and this places an obligation on business not to harm the ecosphere.Des Jardins (1998) explains that business activity would be considered as harming theecosphere when it uses resources at unsustainable rates or creates wastes that cannot beabsorbed by the system.14

It is such competing arguments that make it very difficult for industry, academics andgovernment practitioners to reach a commonly accepted view and a shared understanding of

the meaning of CSR. This research report will describe the prevailing competing argumentssurrounding the notion of corporate social responsibility and examine its relevance to the UKregulated utilities. Given also the wider implications that the CSR notion brings forgovernment, this research report will discuss the role of CSR in government policy in generaland in the said industrial sector in particular.

The proceeding chapters of this paper are structured as follows:

x Chapter 2 deals with the definition of CSR in both its theoretical and operational terms.x Chapter 3 goes into detail to present the prevailing academic views regarding the notion

of corporate social responsibility.

x Chapter 4 presents the role of government in relation to CSR by attaching more weightto the UK experience and the European Unions position on corporate socialresponsibility.

x Chapter 5 comprises the empirical chapter with focus on the regulated industries. Thechapter discusses the case of CSR as the companies themselves currently practice it.

x Chapter 6 states the implications of CSR for government policy in general and theregulated industries in particular.

14 Des Jardins J (1998) Corporate Environmental Responsibility, Journal of Business Ethics, Vol 17, pp825-838.


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2 CORPORATE SOCIAL RESPONSIBILITY

(CSR) DEFINITION

The notion of corporate social responsibility has been open to various interpretations,

reflecting the relationship of business and society at different times of history.15 As argued inChapter 3, the predominant view concerning business responsibility to society is derivedfrom the neoclassical economic position that sees the promotion and serving of interests ofthe firms shareholders as being the main responsibility of business. 16 Whilst the notion ofcorporate social responsibility has evolved over the years, in the context of this researchreport it is imperative to articulate the current meaning of CSR and, thereafter, discuss therole of government in relation to corporate social responsibility.

Historically speaking the notion of CSR has been associated with corporate philanthropy.Well known British and American entrepreneurs realised the need for getting involved with

the community and contributing to its welfare by building schools and hospitals and makingdonations.17 Porritt and Cowe (2002) cite that it was altruism that led Pilkington and Marksand Spencer to set up BitC in 1982. During the late eighties and early nineties pubic opinion,social movements and activities by non-governmental organizations (NGOs) led businessesto develop a more sophisticated approach to CSR, known as enlightened self-interest. Inthis context, the chemical industry developed the responsible care programme in Canada inthe mid 80s but participation to the programme became a requirement for membership of theChemical Industries Association. The programme was taken by the US ChemicalManufacturers Association (CMA) in 1988 and the UK Chemical Industries Association in1989 and members were required to educate their staff and work closely with customers,transporters, suppliers, distributors and communities to achieve effective environmental

management of processes and products.18

The Responsible Care programme is an exampleof business attitude to improve performance for business benefits (ie, improved public imagedue to rise of global environmental concerns) and wider benefits to society (ie, improvedenvironmental and social impact of processes and products).

Since the mid 1990s the notion of CSR has been associated with the terms of corporatecitizenship, corporate sustainability and triple bottom line. The term corporatecitizenship describes a firms engagement with stakeholders rather than shareholders alone.Corporate sustainability refers to corporate behaviour that is likely to affect sustainabledevelopment ie, company activity that creates opportunities for sustainable development.Triple bottom line usually refers to the balance and equal promotion of the economic, social

and environmental interests of a business. These contemporary interpretations of CSR,however, are linked to the idea of self-interest and espouse the business case for corporatesocial responsibility as argued next.

The current prevailing definition of CSR advocates that the firm should engage withstakeholders for long-term value creation. This does not mean that shareholders are not

15 See p4 in the Introduction.16 Friedman M (1970), The Social Responsibility of Business is to Increase its Profits, Business Ethics Readings and Cases in Corporate Morality, Hoffman W M, Frederick R E, Schwartz M S (eds) (2001) (4th edn),McGraw Hill Inc, USA, pp 156-160.17

See Chapter 3 p13-15.18 Tapper R (1997), Voluntary Agreements for Environmental Performance Improvement - Perspectives on thechemical industrys Responsible Care program, Business Strategy and the Environment, Volume 6, pp287-292.


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important, or that profitability is not vital to business success. On the contrary, in order forthe firm to survive and be profitable it must engage with a range of stakeholders whose viewson the companys success may vary greatly. The process of engagement creates a dynamiccontext of interaction, mutual respect, dialogue and change, which will allow sociallyresponsible business to achieve lower costs, higher revenues, improved reputations, lower

risks and ultimately benefit shareholder value. This view of CSR corresponds to thecommonly cited business case for it.19

The current definition of CSR - that postulates the engagement of a firm with stakeholdersrather than shareholders alone - is derived from the stakeholder model of a firm, which wasdeveloped in the United States in the mid 1980s. Epistemologically however, the stakeholdermodel of the firm and the current business case for CSR are different, as it will be shown inChapters 3 and 4. This is mainly because the stakeholder model of the firm is rooted on the(deontological) assumption that the firm ought to engage stakeholders in the decision-makingof the firm as they are likely to be affected by the firm activities whereas, the business casefor CSR is rooted on the (utilitarian) notion that shareholders will increase their financial

interests by engaging in dialogue with other stakeholders of the firm.

To summarise, in its conventional form corporate social responsibility is seen as profitabilityplus compliance plus philanthropy. The current meaning of corporate responsibility isassociated with the recognition that day to day operating practices affect stakeholders andthat is in those impacts where responsibility lies, not merely in efforts to do good (Andriof etal, 2002).

Operational definition of CSR - compliance plus, best practice

and cost-benefit analysisFrom the above it can be argued that the current definition of CSR is developed around twomain principles:

x the interests of the firms stakeholders should be represented at the company board andthe decision-making process of the firm;

x since corporate law protects the interests of the firms shareholders, a corporate sociallyresponsible or corporate citizenship stance would involve the formulation of decisionsthat go beyond legal requirements and exceed the law, compliance plus.

Thus, the notion of CSR assumes corporate behaviour that goes beyond legal requirements.CSR is the detailed issues which an organization may be taking into account whendeveloping strategies and on which an organization exceeds its minimum required obligationsto stakeholders.20 Traditionally, these issues are both internal and external to theorganization ie, employee welfare, working conditions, green issues, products etc. Today, thecorporate social responsibility handbook extends to human rights, workplace practices,globalisation practices, corporate power, environmental impact, corruption, communityaffairs and effective stakeholder dialogue (Cowe, Porritt, 2002). By meeting its legalobligations an organization should not necessarily assume socially responsible behaviour.

19

Andriof J, Waddock S, Husted B, Sutherland Rahman S (eds) (2002), Unfolding Stakeholder Thinking -Theory, Responsibility and Engagement, Greenleaf Publishing, UK.20 Johnson G, Scholes K (1999), Exploring Corporate Strategy, Fifth Edition, Prentice Hall, London.


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Generally speaking, an organisation will avoid breaking the law because of the fear ofprosecution (Bichta, 2000). The notion of CSR confers to activities that exceed legalrequirements and the way in which the organization will manage the CSR agenda.

In practice, CSR is currently translated as best practice ie, the rigorous assessment and

management of a companys impacts across the entire business from the point of materialsupply to product disposal (Cowe, Porritt, 2002). To conclude, in its broadest sense,contemporary CSR represents companies responsibility to improve all their impacts onsociety, when not required to do so by law.

It is fair however to argue that within the present (business) share ownership paradigm,shareholders will have the final say if corporate action is not constrained by regulation. This

position might be altered by changing the relationship between the board and stakeholders,which is the intention of the current meaning of CSR. It may be that government has a role to

play towards creating the conditions where such a switch in emphasis can be made.

To be able to discuss the role of government in relation to CSR, the development of anoperational and measurable definition of CSR is important. To this end, the World Bank hasdeveloped an operational term of CSR which considers CSR as the process of managing thecosts and benefits of business activity to both internal (ie, employees, shareholders, investors)and external (institutions of public governance, community members, civil society groups,other enterprises) stakeholders. Setting the boundaries for how these costs and benefits aremanaged ispartly a question of business policy and strategy and partly a question of publicgovernance.21

The next section discusses the role that government has played to date in relation to corporatesocially responsible behaviour.

The role of government

From the industrial revolution to recent years, social objectives have been almost entirely theresponsibility of government. Social movements, NGO activity and pressure groups duringthe 70s and 80s led to the mobilisation of public opinion demanding from corporations todemonstrate a socially responsible stance. Since the earlier twentieth century, Europeanmember states have developed legislation to control the relationship between employee andthe firm, health and safety at work, issues of environmental interest, discrimination and equal

opportunities at workplace. Across Europe, state owned companies were created to pursuecommercial and social objectives, whereas private sector companies were allowed to pursuetheir commercial objectives almost exclusively.

Legislation, regulation and taxation have been the favourable tools employed by governmentto promote and protect social objectives. In the area of the environment, command andcontrol techniques have been favoured by the European Union since the 1970s whereas ashift towards shared responsibility between government and industry is another favourable

policy approach since the mid 1990s.

21 Fox T, Ward H, Howard B (2002), Public Sector Roles in Strengthening Corporate Social Responsibility Abaseline story, The World Bank.


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In the UK, the governments privatisation programme of the 1980s shifted public expectationof the private sector. Whilst until then, social objectives had been mainly the responsibilityof government, the privatisation of gas, water and electricity introduced a new paradigm. Itcreated public companies owned by shareholders pursuing the same kind of financial returnsas in any other public company, but the companies had also clear social objectives. In the

case of the privatised utilities, these social objectives were managed through the regulatoryregime, but the existence of the companies as stock market vehicles demonstrated thatfinancial and non-financial objectives could co-exist (Cowe, Porritt, 2002).

The Labour government has maintained the interest to bridge public and private, social andfinancial objectives by drawing the private sector into the provision of social goods ie,

public-private partnerships. The government has taken steps to reinforce the responsibility ofthe private sector with regard to its social and environmental impact. A number of legislativemeasures have been passed to support sustainable development including the climate changelevy, the community investment tax credit and the Pensions Act. The company law review(1998-2002) has rejected the concept of pluralism which would have required directors to

consider the interests of other stakeholders as well as pursuing the interests of shareholders,but the governments white paper, which incorporated the reviews recommendations, hascommunicated the message that directors would be foolish to omit such matters. 2223

A question of interest therefore in the contemporary debate of CSR is whether governmentshould assist business to exceed its legal obligations and hence commit itself to sociallyresponsible behaviour, as defined in current terms. A second question considers the nature ofa potential government role: Should government create the opportunities/enable business toopt for the business case for CSR? Or should government create the environment for businessto realise the potentials of seeking legitimacy directly from the firms stakeholders rather thanshareholders alone?

Interestingly, recent published studies suggest that government may play a role to encourageand promote the social responsibility of business. As Table 1 shows, the World Bank hasidentified four principal public sector roles in relation to CSR that are mandating, facilitating,

partnering and endorsing roles.

Table 1: Public sector roles

Mandating Command and

control

legislation

Regulators and

inspectorates

Legal and fiscal

penalties and

rewards

Facilitating Enablinglegislation

Creating incentives Capacity building

Funding support Raising awareness Stimulatingmarkets

Partnering Combiningresources

Stakeholderengagement

Dialogue

Endorsing Political support Publicity andpraise

Source: Fox, Ward, Howard (2002), The World Bank

22

The Company Law Review Steering Group (2001), Modern Company Law - For a competitive economy,Final Report, DTI.23 Department of Trade and Industry (2002), Modernising Company Law, Cm 5553-I.


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Public sector activities may vary depending on the CSR issue at stake. Table 2 showspotential public sector activities for the CSR issues of corporate governance and communitydevelopment.

Table 2: Classification of public sector activities

Public sector

role

CSR theme Mandating Facilitating Partnering Endorsing

Corporategovernance

Stock exchangeregulations andcodes; companylaw

Implementinginternational

principles

Multi-stakeholdercodedevelopment

Communitydevelopment

Mandatingcorporatecontributions

Tax incentives;timebankschemes; leaguetables to promote

pear pressure

Public-privatepartnerships

Publishingleadingcorporategivers

Source: Fox, Ward, Howard (2002), The World Bank

Cowe and Porritt (2002) call for intelligent government action to ensure that corporateaction will contribute towards sustainable development since voluntary corporate action alonewill not be enough. This government intervention at the beginning will consist of a set ofsoft measures such as changing the political environment ie, mandatory company reportingand hence, building up to hard action - laws and regulations. The authors belief is that themore corporate performance is exposed to the public gaze through effective reporting, themore effective civic regulation can be and the less the need for formal governmentmeasures. Cowe and Porritts view corresponds to a government role that will increasingly

enable companies to seek legitimacy directly from their stakeholders.


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3 THE ACADEMIC VIEW - THEORETICAL

DEBATES

The development of corporate social responsibility (CSR)

The notion of corporate social responsibility made its appearance almost a hundred and fiftyyears ago. It emerged in the United States of America as a social and political reaction to therapid growth of capitalism during the thirty years following the American civil war (1861-5).24 Big companies, as we know them today, appeared in the United States in the 1870s.But as they grew, an anti-trust movement against the robber barons, also grew.25McEwan (2001) explains that the rationale for the anti-trust movement was the newindustrial trusts and corporations which had become too powerful, wasted resources, were

politically dangerous and socially irresponsible (p4).

The American government assumed responsibility for correcting the social behaviour of bigcorporations as early as the 1890s and it passed laws on child labour, safety at industrial sites,and on workers rights to form trusts.26 Nader et al concede that American corporations

became more aware of their public responsibilities after the US Supreme Courtannouncement in 1906 which condoned that the corporation is a creature of the state. It is

presumed to be incorporated for the benefit of the public. It receives certain special

privileges and franchises, and hold them subject to proper government supervision.27 TheAmerican government extended legislation on labour protection, public utilities and bankingservices during the nineteenth and in the early twentieth century. Trying to distancethemselves from government intervention however, North American entrepreneurs like

Francis C Lowell, Ford and Rockefeller laid education in the centre of the relationshipbetween individual entrepreneur and corporate responsibility.28 For these entrepreneurseducation was the means to personal advancement. Their contributions to private universitiesintroduced a culture of private support for public works which still persists in the Americanthinking today.

In the UK, the idea that business should take into consideration social and not only economicissues is traced back to the Victorian industrialist era. Amongst the pioneers of this new era,Robert Owen, Lord Shaftsbury, Lord Ashley and John Stuart Mill called for a moreresponsible approach to the needs of those who failed to prosper from the industrialrevolution. Entrepreneurs such as Robert Owen, Cadbury and Leverhulme adopted theapproach of enlightened self interest, by arguing that workers who were treated well wouldrespond well (Cannon 1994 p17). These entrepreneurs funded a range of welfare activitiesincluding public health and education.

In contrast to the USA, in Europe the commitment to intervention, education and a form ofpartnership between the state and the enterprise to deliver social goals has persisted since the

24 McEwan T (2001), Managing Values and Beliefs in Organisations, FT Prentice Hall, London.25 Josephson M (1962), The Robber Barons, 2nd edn, Harvest/HBJ Books, New York.26 Farmer R, Hogue D (1973), Corporate Social Responsibility, Social Research Associates Inc, USA.27 Nader R, Green M, Seligman J (1997), The Corporate Impact, Issues in Business and Society, Steiner G,

Steiner J (eds) (2nd

edn), Random House, New York, pp22-35.28 Cannon T (1994), Corporate Responsibility A textbook on business ethics, governance, environment, roleand responsibilities, Pitman Publishing, London.


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nineteenth century and particularly the earlier twentieth century. In France and Germanymuch of the impetus for industrialisation and change came from government action duringthe nineteenth century. In the middle of the twentieth century, Scandinavian governmentswere committed to develop and establish a bond between the individual and the enterprise.They put a strong emphasis on community based projects which involved the provision of

business economic support for school and college facilities for workers and their families,medical services, etc. This tradition of intervention created the climate which allowed thestate to develop the most comprehensive array of social welfare support in the world in themiddle of the twentieth century (Cannon, 1994).

Despite government intervention however, by the 1970s corporations had grown faster thanthe total world economy. Nader et al (1974) cite a few of the facts: in 1974, Exxonannounced greater sales than each of the gross national products (GNPs) of Austria, Denmarkand South Africa. The same year General Motors employed more people, 734,000 than thestates of California, New York, Pennsylvania and Michigan combined. By 1974, the numberof American corporations owing more than half of the total assets of the remaining 1.8m

corporations fell from 200 to 100. Consolidation amongst corporations continued during theeighties and resulted in a further reduction of the number of American multinationals -holding over half of the assets of the remaining two million corporations - from 100 to 80.By 1991 the leading 50 global economies included 13 major global corporations with greaterassets than several Western countries.

It may be that the notion of corporate social responsibility has its foundations in the 19thcentury, but the modern understanding of corporate social responsibility is particularly linkedwith the social movements of the 1970s in the USA and Western Europe. The prolonged

period of post-war economic growth and the birth of vibrant cultures such asenvironmentalism and feminism, mobilised the public in demanding from companys

commitment to environmental protection, recruitment of minorities, charitable donations, andcommunity investment.29 Rachel Carsons book - Silent Spring, stressed all the problemsthat the unrestricted use of pesticides caused on air and water.30 Miller (1995) cites specificevents such as the first earth days, held in America in 1970s, the demand by anti-Vietnamwar activists for businesses to stop producing chemical weapons, African-American andfemale groups campaigns for equality in the workplace, and protests against the use andtransportation of toxic materials as having an impact on the way companies were expected torun their business.

The increased public interest towards societal problems initiated the institutionalisation ofmany of them such as environmental issues in business and government. 31 In Britain and theUnited States new laws were introduced and new agencies were created like the Departmentof Environment and Environmental Protection Agency respectively. Corporations responded

positively to the new legislation realising first, that environmental policy could not beformulated without their expertise, and secondly, that a uniform set of national regulationswould provide a level playing field for business.32

29 Miller W H (1995), More than Just Making Money - The last 25 years have seen industry assume a newmission, corporate social responsibility, Industry Week, 244, 13, pp91-95.30 McCormick J (1989), The Global Environmental Movement Reclaiming paradise, Belhaven Press, London.31

Buchholz R (1993), Principles of Environmental Management - The greening of business, Prentice-Hall,USA.32 Enloe C H (1975), The Politics of Pollution in a Comparative Perspective, Longman, London.


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In conclusion, the meaning of corporate social responsibility in the 1970s was associated withthe excluded social costs of production and the hidden costs occurred by society as a result of

business activities including:

x industrial pollution and toxic waste;x racial and sexual discrimination;x political influence of powerful corporations;x invasion of employees privacy;x deceptive information in marketing;x product safety;x the price of technology, effects of pesticides, aerosols and nuclear power;x increasing concentration of wealth and income in fewer hands;x business crime (Nader et al, 1974).Alongside the 1970s events and the social and political movements, the statement by MiltonFriedman on the social responsibility of business has been the starting point of academicdiscussion of corporate social responsibility.

The classical view of corporate social responsibility

Milton Friedman (1970) criticised corporate social responsibility arguments by stating thatfew trends could so thoroughly undermine the very foundations of our free society as theacceptance by our corporate officials of a social responsibility other than to make as muchmoney for their stockholders as possible.

The starting point in Friedmans argument is that people have responsibilities but businessdoes not. A corporation is an artificial body created by real people, so business cannot beexpected to act in the same way that people do. Friedman examines the notion of socialresponsibility by questioning what is implied by it. The starting point of his discussion iswith businessmen and with the CEO who have the responsibility of running the business.The role that Friedman attributes to the CEO in a corporation is that of an agent. Thecorporation employs him to make as much money as possible. Thus in his capacity as acorporate executive, the manager is the agent of the individuals who own the corporation

and his primary responsibility is to them (Friedman, 1970, p156). Friedman does not denythat corporate executives as individuals may also act based on their own will. However,these actions are acceptable outside the area of business since the individual uses his owntime and money. If the executive officer then acts in a socially responsible way, it is not inthe interests of his employers, because he acts as a principal not as an agent.

Friedman saw the decisions of a few executives to spend money on social purposes as beingthe duty of civil servants. Whilst civil servants are appointed by government, and theexecutive performs the role of a civil servant, it becomes apparent that corporations accept

political mechanisms and not market mechanisms as factors that determine the allocation ofscarce resources.33 Thus in Friedmans view, if firms are to exercise the notion of corporatesocial responsibility, the foundations of a free market system would be undermined by

33

According to Friedman, the principle which underlines the political mechanism is conformity, where theindividual must serve a more general social interest. The individual may express its own views but if overruledhe must conform to the majority views.


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replacing it with a centrally controlled system of governmental control of prices and wages.As Friedman puts it, if social responsibility is taken seriously, it would extend the scope of

political intervention to every human activity. This would undermine the political principleof the market mechanism, which is unanimity.34 With regard to Friedmans argument, it isimportant to point out that he does not claim that the corporation has no responsibilities at all.

On the contrary, he argues that corporations are responsible, but only to one group of people -the stockholders, since they bring the money into corporation and appoint managers tomaximise their capital (Bichta, 2000).

Before Milton Friedman, classical economists, with Adam Smith as their pioneer, alsoassumed that if the government would mind its own business, markets can still be perfectand self-correcting, and the gross national product (GNP) could be the proper barometer ofsocietal wealth. Friedman defines the social responsibility of business in a strictly limitedneo-classical economic sense. As Roome (1997) says, the orthodoxy of neo-classicaleconomics is that business is a collective term to describe that part of society which isconcerned with the production and exchange of goods and services, in market and mixed

market economic systems.35

What distinguishes business organisations from other sectors ofsociety is that their viability depends on securing profits, the excess of revenue from the saleof outputs over the costs of their production. It follows that the principal focus of businessactivity is the market and the main purpose of business is to make money and increase

profitability. Roome also argues that by accepting that the purpose of business is to makeprofit this implies the acceptance of two axioms:

First, given a risk free choice between economic opportunities, managers ofbusiness will prefer options which yield more profit to those that yield less.Second, managers involved in pure profit maximising decisions will confinetheir frame of analysis to an assessment of the stream of revenue and costs

projected to accrue to the company from alternative investments. Thesestreams determine profitability when considered in relation to the risksassociated with each other alternative project (p47).

Friedmans position constitutes the heart of managerial capitalism, which is built on the ideathat in return for controlling the firm, management vigorously pursues the interests ofstockholders. Both, however, the neoclassical view of business responsibility to society andthe managerial view of capitalism has been challenged ever since the 1970s. Scholars havequestioned the adequacy of the neoclassical paradigm as the adequate theoretical frameworkfor understanding and interpreting the relationship between individuals and society andindividuals and organisations. The central argument of managerial capitalism has also beenunder scrutiny and new theoretical perspectives have contributed to the rise of a newapproach of governance in business.

34 According to the principle of unanimity, in an ideal free market, cooperation is voluntary and all parties tocooperation benefit or they need not participate. Under the principle of unanimity, there are no values, no socialresponsibilities other than the shared values and responsibilities of individuals. Therefore society is a collection

of individuals and of the various groups they voluntarily form (Friedman, 1970).35 Roome N (1997), Corporate Environmental Responsibility, Business and the Natural Environment, Bansal P,Howard E (eds), Butterworth-Heinemann, Oxford, pp40-62.


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The new meaning of corporate social responsibility - thetheory of modern corporation

The classical view of business responsibility to society has been challenged by new

arguments that made their appearance in the 1980s and have seen to contribute to thedevelopment of the theory of the modern corporation (Bichta, 2000). These new argumentsattach a new meaning to corporate social responsibility as they consider:

x a new stakeholder approach as opposed to the traditional view of promoting the exclusiveinterests of stockholders;

x managerial values and discretion as being key promoters of socially responsible actionsand the notion of organisational moral responsibility analogous to that of individuals;

x new aspects in corporate legitimacy;x alternatives to the traditional view of corporate governance;x the role of an interventionist government in enhancing corporate social responsible

behaviour (Bichta, 2000).36

Each of these aspects are considered in turn.

The stakeholder theory

The central position of managerial capitalism has been challenged by the stakeholder theoryof modern corporation. The stakeholder theory has made its appearance in the early eighties,and the pioneers of the theory have concentrated their arguments on three main aspects of thetheory: a descriptive/empirical, an instrumental and a normative aspect.37 Although in the

management literature, the stakeholder theory corresponds to all three approaches, thediscussion in the following paragraphs concentrates on the normative aspect as theunderpinning basis of the stakeholder theory of modern corporation.

The stakeholder theory calls for a revitalisation of the concept of managerial capitalism byreplacing the notion that managers have a duty to stockholders with the concept thatmanagers bear a fiduciary relationship to stakeholders.38 The stakeholder theory concentrates

36 The theory also explores the criteria on evaluating the legitimacy of corporate social responsibility.37

The stakeholder theory in its descriptive/empirical form is used to describe and sometimes explain specificcorporate characteristics and behaviours. The instrumental aspect of the theory is used to identify theconnections or lack of connections between stakeholder management and the achievement of traditionalcorporate objectives ie, profitability, growth. The normative aspect of the theory is used to interpret the functionof the corporation, in Donaldson T, Preston, L E (1995), The Stakeholder Theory of the Corporation - Concepts,evidence and implications, Academy of Management Review, Vol 20, pp65-91.38 In short, the concept of the stakeholder is a generalisation of the notion of stockholders, who themselves havesome special claim on the firm. In the stakeholder theory, just as stockholders have a right to demand certainactions by management, so do the other stakeholders have a right to make claims. The main question in thestakeholder theory is about the exact nature of these claims, however the theory applies the same logic used bythe stockholder theory. Stakes require action of a certain sort, and conflicting stakes require methods ofresolution. The stakeholder theory does not give primacy to one stakeholder group over another, though it isexpected there will surely be times when one group will benefit at the expense of others. However,

management must keep the relationships amongst stakeholders in balance. See Freeman R E, Business Ethics Readings and cases in corporate morality, Hoffman M W, Frederick R E, Schwartz (eds) (2001), 4

th edn,McGraw-Hill Inc, USA, pp160-168.


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its focus on aparticular question: For whose benefit and at whose expense should the firmbe managed?39

To seek answers to this question, the pioneers of the theory define the stakeholders as allthese groups that have a stake in, or a claim on the firm, including owners, management,

suppliers, customers, employees and the local community (Evan, Freeman, 1988). Drawingon Kantian philosophy, they argue that each of these stakeholders groups has a right not tobe treated as a means to some end, and therefore must participate in determining the futuredirection of the firm in which they have a stake.

To be specific, Evan and Freeman (1988) use two themes which represent two branches ofKantian philosophy and moral theory to justify the reasoning of the central argument ofstakeholder theory. The first theme is concerned with the rights and duties of the owners(and their agents) of private property, and the effects of this property on the rights of others(Evan, Freeman, 1988, p148). The second theme is concerned with the consequences ofmanagerial capitalism and the effects of the modern corporation on the welfare of others.

The view of the corporation as having no right to decide how things are going to be for itsconstituents is challenged by the position that if the modern corporation requires treatingothers as means to an end, then these others must agree on, and hence participate (or chose

not to participate) in, the decisions to be used as such (Evan, Freeman, 1988, p148). Thus,property rights are legitimate but not absolute, particularly when they conflict with rights ofthe others. As the authors advocate the property rights are not a licence to ignore Kants

principle of respect for a person.

In terms of corporate externalities and harmful actions, the stakeholder theory maintains thatpersons are responsible for the consequences of their decisions and activities, and hence any

theory that seeks to justify the corporate form must be based at least partially on the ideathat the corporation and its managers as moral agents can be the cause of and can be heldaccountable for their actions (Hoffman, Frederick, 1998, p148).

Thus, a stakeholder theory needs to be consistent with two principles, namely the principle ofcorporate rights (PCR) and the principle of corporate effects (PCE). According to the

principle of corporate rights, corporation and managers may not violate the legitimate rightsof the firms constituents to determine their own future. The principle of corporate effectsretains that the corporation and its managers are responsible for the effects of their actions onothers. Foremost, the acceptance of these two principles facilitates the development of twofurther stakeholder management principles which serve as the foundation for articulatingthe stakeholder theory: the principle of corporate legitimacy and the stakeholder fiduciary

principle. The principle of corporate legitimacy redefines the purpose of the firm in linewith the principles of corporate rights and effects. The stakeholder fiduciary principledefines the duty of management to recognise the claims of the stakeholders.

The structural mechanisms to facilitate the application of a stakeholder management conceptare two:

39

Evan W M, Freeman R E (1988), A Stakeholder Theory of the Modern Corporation - Kantian capitalism,Business Ethics - Readings and cases in corporate morality, Hoffman M W, Frederick R E (eds) (1995), 3rd edn,McGraw-Hill Inc, USA, pp145-154.


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x a stakeholder board of directors which will consist five stakeholder groups includingemployees, customers, suppliers, stockholders and community members;

x a revised and reformed corporate law which requires corporations to be managed for thebenefit of the stakeholders and allow these groups to participate in the decision-making of

the firm given it will affect their welfare. For instance, some existing forms of law in thisarea are related to product liability and labour law.

In a later paper, Freeman has taken the view that the stakeholder theory can be unpacked intoa number of stakeholder theories, each of which has a normative core.40 The normativecore however, is not necessarily reducible to the traditional view of property rights, becausecertain normative cores can be consistent with modern understandings of property rights ie, afeminist standpoint, an ecological or pragmatic liberalism.

Indeed, Donaldson and Preston (1995) use the evolving arguments of the property rightstheory to justify the normative basis of the stakeholder theory of modern corporation.

Donaldson and Preston argue that there is concurrence of opinions on the theoreticaldefinition of a property as a bundle of many rights, some of which may be limited. Coase(1960) adhered to the view that what a landowner in fact possesses is the right to carry out acircumscribed list of actionsand his rights as a land-owner are not unlimited.41 Authorslike Honore (1961) and Pejovich (1990) have emphasised the relationship between propertyrights and human rights by noting that the right of ownership is not an unrestricted right. 4243

The notion that property rights are embedded in human rights and that restrictions againstharmful uses are intrinsic to the property rights concept clearly signals the engagement ofgroups other than the stockholder group into the property rights theory of the firm. It is

acknowledged however, that by simply bringing non-owner stakeholders into the conceptionof property does not provide by itself justification for stakeholders arguments assigningmanagerial responsibilities toward specific groups, ie, employees, customers. Nevertheless,it is important that the contemporary theoretical concept of property rights does not ascribeunlimited rights to owners and hence does not support the popular claim that theresponsibility of managers is to act solely as agent for the shareowners (Donaldson, Preston,1995).

In a final note, it is important to refer to the managerial implications as stated in thestakeholder theory. Accordingly, management is to play a crucial role. It must be in a

position to avoid giving primacy to one stakeholder group over another. Donaldson andPreston (1995) support the view that managers should acknowledge the validity of diverse

stakeholder interests and should attempt to respond to them within a mutually supportive

framework, because that is a moral requirement for the legitimacy of the management

function (p87). This managerial function is associated with the firms survival which couldbe in jeopardy if stakeholder interests are not in balance. As an example, when wages are toohigh and product quality is too low, customers may leave, suppliers could suffer and owners

40 See Freeman R E, Business Ethics Readings and cases in corporate morality in Hoffman M W, Frederick RE, Schwartz (2001), 4th edn.41 Coase R H (1960), The Problem of Social Cost, Journal of Law and Economics, Vol 3, pp1-44.42 For more information on contemporary arguments of property rights look at Donaldson and Preston (1995).43

Honore A M (1961), Ownership, Oxford Essays in Jurisprudence, Guset A G (eds), Claverdon Press, Oxford,pp107-147; Pejovich S (1990), The Economics of Property rights Towards a theory of comparative systems,Kluwer Academic Publishers, Dordrecht, The Netherlands.


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could start selling stocks and bonds, depressing stock price and making it difficult to raisecapital at favourable prices (Evan, Freeman, 1988). Evan and Freeman (1988) have taken themanagerial role in the modern corporation even further by anticipating that that managerswill perform their duties better if they are elected unanimously and have no direct connectionto the firm, a view which constitutes the heart of modern corporate governance.

The shift however from the traditional shareowner orientation to a stakeholder orientationwith the implications it brings for managers is not free from criticism, particularly in light ofmaking it more difficult to detect self-serving behaviour by managers ie, managers may claimthat they serve some broad set of stakeholder interests while they increase their powers andemoluments.44

The response to this criticism has been that the conventional model of the corporation hasfailed in both its legal and managerial terms to discipline self-serving behaviour. Indeed, thelatest corporate collapses of Enron and Worldcom were not detected either by the law or itssenior management. On the other hand, the stakeholder model entails comprehensive

restrictions on such behaviour simply because in its very foundation it prohibits any singleattention to the interests of any single constituency. As Donaldson and Preston (1995) argue,the next step is to develop the legal version of the stakeholder model.

From the above discussion it becomes clear that the aim of the stakeholder theory is toredefine the purpose of business. Whilst the conventional view is that business simply existsto respond to signals from markets and the economic system, and therefore the purpose of

business is connected to profit-making, the stakeholder theory offers an alternative to bothbusiness and government institutions as to what is the very purpose of a business: that is toserve as a vehicle for coordinating stakeholder interests and to meet the claims of each of thegroup of stakeholders, who are affected by corporations actions (Hoffman, Frederick 1995).

But what has promoted the attack on the old view of managerial capitalism and the rise of anew theory in its place? Two arguments prevail: the first considers that todays corporationsno longer seem to fit the old model. In the new model, corporations can no longer accurately

be viewed as private property. Ownership separates from control, and therefore corporationsseem less like instruments of their owners and more like autonomous entities capable of theirown goals and decisions (Hoffman, Frederick 1995).

The second argument develops around power relationships between business and society. Itpostulates that social power inevitably implies social responsibility, and corporations that failto exercise a responsibility commensurate with their power should lose that power. Societyhas apparently become more aware of the external costs ie, pollution, hazardous products, jobdissatisfaction passed on to it by corporations. With these costs in mind, the basicassumption of the traditional view of the identity of individual and social well-being is inquestion (Hoffman, Frederick 1995).

44 Orts E W (1992), Beyond Shareholders Interpreting corporate constituency statutes, The GeorgeWashington Law Review, 61, 1, pp 14-135.


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Decision-making in the modern corporation

The classical view of organisations being an artificial person is also under scrutiny under thetheory of modern corporation. Instead scholars become interested in applying moralresponsibility to organisations, analogous to that which one might apply to individuals.

Goodpaster and Matthews (1982) argue that organisations can, and should be built upon theideas and efforts of individuals and that they should therefore be expected to hold the moralattitudes that individuals hold.45 Their position is based on the assumption that corporationsconsist of persons that make intentional and autonomous decisions, and therefore many of theattributes of human beings could be projected onto corporations.

In order to establish a relationship of moral responsibility in organisations analogous of thatof individuals, Goodpaster and Matthews analyse the process of moral responsibility ofindividuals and apply it at the level of an organisation. Individual decision-making (or moralresponsibility) consists of rationality and respect towards others: it involves careful mappingof alternatives, clarity about goals and purposes, attention to details of implementationand

concern for the effects of an individuals decisions and policies on others (p134). Similar,organisations show the same kind of rationality and respect that individuals show whilstmaking decisions. Some corporations have built features into their management incentive

systems, board structures, internal control systems, and research agendas that in a person we

would call self-control, integrity, and conscientiousness (p135). Some others also payattention to the human impact of their operations and policies and reject practices that mightcreate controversy (p136). Thus this moral responsibility that exists among individuals alsoexists among organisations in the form of corporate conscience.46

Having rejected the view that organisations are artificial persons, scholars attribute the levelof weight to both managerial vales and managerial discretion as promoters of socially

responsible actions.

In organisational (strategic) decision-making, managerial values have a crucial role to play.Freeman and Gilbert (1988) stress that all actions taken by organisations and their constituentmembers are underpinned by the values held by those individuals and groups (values

principle).47 Any actions taken by them will involve decisions or choices, which in turn willbe affected by the dominant value system (interdependence principle). Therefore the processof strategic management must take account of the values held bymembers of organisationsand other stakeholders in policy formulation and implementation.48 Consequently, Freemanand Gilbert argue (1988) that:

corporate strategy which ignores the role of people in the organisationsimply ignores why organisational members act in the way they do. Corporatestrategy must return to the individual values of corporate members, before it isformulated. It must be built on these values rather than taking them asconstraining forces. (p11)

45 Goodpaster K E, Matthews Jr J B (1982), Can a Corporation Have a Conscience?, Harvard Business Review,Vol 60, No 1, January-February, pp132-141.46 Between the options of the invisible hand, government intervention and management as mediators thatensure corporate moral behaviour, Goodpaster and Matthews are in favour of the management option. This is

because the other two notions fail to locate the source of corporate responsible behaviour in the corporation

itself and rely instead on external systems and forces of the corporation.47 Freeman R E, Gilbert D R (1988), Corporate Strategy and the Search for Ethics, Prentice-Hall, New York.48 Smith D (1993), (eds) Business and the Environment, Chapman Publishing Ltd, London.


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The degree of managerial discretion is important also in a companys socially responsibleactivities. Ackerman (1975) writes that corporate social responsibility is at the discretion ofmanagerial actions and choices.49 Carroll (1979) pursues the belief that managers are moralactors who are obliged to exercise the discretion that is available to them within the domainof corporate social responsibility.50 Wood (1991) also claims that managers have the

opportunity to express discretion in almost every domain of social responsibility throughapplying their own morality to these decisions.51 The principle implies that becausemanagers possess discretion, they are responsible for exercising it, and cannot avoid thisresponsibility by referring to rules, policies and procedures (Wood, 1991, p699).

These views are important contributions to corporate social responsibility as they facilitate anew understanding of the managerial role according to which managers pursue theorganisational goals but organisations also provide space for managers to define their own

purpose and behaviour (Roome, 1997).

Corporate legitimacy

Corporate legitimacy is another central theme of the theory of modern corporation. Grolin(1998) offers an interesting account of three competing models of corporate legitimacy, theclassical model, the stakeholder model and the political corporation model. Friedmansapproach is defined as the classical model of corporate legitimacy because it concentrates onthe economic functions of the corporation.52 The stakeholder model described earliercomprises the second model of corporate legitimacy as it requires companies to be responsiveto those in society, immediately affected, in a tangible way by corporate decisions andactions.

The political corporation model reflects an increasing globalisation of the economy and a

parallel weakening of national government authority, and it goes beyond the two othermodels by advocating that a corporation should adopt a clear set of moral and ethicalvalues, which relate to the general public both globally and locally, and which can guide

corporate actions irrespective of whether [the corporation] is explicitly required by law(p217). Grolin has based his argument of the political corporation model on the Brent Sparconflict to suggest that companies are likely to acquire their legitimacy directly from the

public. In the period of the conflict, Shell was unable to solve the problem relating to thedisposal of its oil storage platform through the involvement of the (British) government. Shellinstead experienced a consumer boycott across the northern countries. The Brent Sparconflict suggests a clash between the reductionist rationality of the scientific expert and thecommon-sense rationality of the lay public (p219). It also marks a change in the location ofthe driving forces of politics from formal political institutions to groups and individuals of

civil society (p219). Based on the weakness of political institutions and of science toestablish the legitimacy of organisational activity, in the future corporations are likely to beheld accountable by the public for legitimate activities (Bichta, 2000).

49 Ackerman R W (1975), The Social Challenge to Business, Harvard University Press, Cambridge MA.50 Carroll A B (1979), A Three-Dimensional Conceptual Model of Corporate Social Performance, Academy ofManagement Review, Vol 4, pp497-505.51 Wood D J (1991), Corporate Social Performance Revisited, Academy of Management Review, Vol 16, No 4,

pp691-718.52 Grolin J (1998), Corporate Legitimacy in Risk Society - The case of Brent Spar, Business Strategy and theEnvironment, Vol 7, pp213-22.


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Corporate governance

The governance of a corporation is defined by Cannon (1994) as the sum of those activitieswhich make up the internal regulation of the business in compliance with the obligations

placed on the firm by legislation, ownership and control. As the same author explains,

changes in industrial structures, shifts in economic relationships and the interaction betweenbusiness and the community are forcing society and firms to review the ways in whichorganisations are governed.

In particular, since the early 1980s the different groups of stakeholders have challenged theconventional view of governance. The case for corporate governance has been largelyinfluenced by the corporate collapses which occurred in the United States and Britain due tofraud or mismanagement since the 1980s. Public anxiety about local and national economicdecline, shareholder disappointment at poor financial returns and declining asset values

provoked newspaper headlines and demands by politicians for reform of a companysgovernance with the threat of legislative action if change was delayed (Cannon, 1994). The

growing importance attached to re-appraising the governance of modern businesses was alsoin response to public concern about the large remuneration packages offered to seniormanagers, often without the approval of shareholders. Managerial capitalism is seen to

benefit executives at the expense of owners even if the firm is performing poorly (Cannon,1994).

So what are the objectives of corporate governance of the modern corporation? It firstreassesses the relationship between the notions of ownership and control by separating them.The disappointing performance of many firms in late 1980s and 1990s prompted investors tosearch for ways of exerting more direct pressure on the firm and its management. Thisinterventionist approach adopted by investors groups in the United States stands particularly

in contrast with non-interventionist traditions preferred in Britain. By 1991, twenty ninestates in the US had adopted statutes, which specified that boards of directors have a right toconsider the interests of non-shareholder, stakeholders, in board decision-making.

Corporate governance reappraises the behaviour of directors. Statutory responsibilitiesregulate the activities of companies and their directors. It is argued, however, that law andregulation may offer protection against abuse of power but cannot affectively deal with theuse of authority and opportunity. Thus, corporate governance concentrates its focus onsupporting a stronger policing role for non-executive directors, separating the roles ofchairman and chief executive and advocating transparency in internal dealings ie, directors

pay (Cannon, 1994).

Corporate governance also reassesses the role, relationship and reporting procedure ofdirectors in relation to the auditing of the company.53 Finally, it promotes the issues ofdisclosure and transparency on the issue of executive remuneration.

Since the early 1990s a number of committees have been set up to make recommendations onthe new forms of corporate governance. The results of the committees work have been

published in reports tackling issues on accountability, disclosure and monitoring procedures.The Harvard Business Review set up a working group on corporate governance in 1990. The

53

The audit of a company is the consolidated statement of accounts including the balance sheet, trading andprofit and loss account examined by a qualified auditor and assessed as to whether these financial statementsprovide a true and fair account and comply with legal requirements (Cannon, 1994).


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group was involved in exploring investors rights and management accountability, the rolesof executive and non-executive directors in both monitoring management performance andrepresenting shareholders interests, and matters relating to remuneration and the conditionsof employment agreed with managers. The groups findings were published as a newcompact for owners and directors. In Britain, the Cadbury Committee (1992) was set up and

produced specific proposals for change in the pattern of corporate governance. Thecommittees deliberations suggested the strengthening of the role of the audit committee, thedevelopment of a contributory role of independent directors on the committee and thestrengthening of their role in the firm. The Cadbury committee recommended that it should

be the responsibility of the audit committee to discuss the audit with the auditor and approvethe company accounts.54

In 1998, the Organisation for Economic Cooperation and Development (OECD) developed aset of corporate governance standards and guidelines addressing five key areas of corporategovernance namely protecting the rights of shareholders; the equitable treatment of allshareholders; the role of stakeholders in corporate governance; the need for timely and

accurate disclosure and transparency and strategic guidance on the responsibilities of theboard. The principles are intended to provide guidance in the development of good corporategovernance for companies and otherorganisations and assist national government to evaluateand improve corporate governance.55

The role of government

In the theory of the modern corporation it is argued that the government has a potential roleto play towards promoting and enhancing corporate social responsibility.

Reich (1998) argues that the government should act as arbiter of business responsibility in

society.56 The importance for society of relying on the good will and responsibility ofexecutives rather than political forces is recognised. The argument, however, is thatsometimes political decisions may be required to answer major questions ie, corporatesocial responsibility issues. This is because CSR issues also fall in the arena of public policywhich is the primary government task. For instance, the question should profitablecompanies lay off redundant employees rather than redeploy them or retain them for new jobsis a matter of corporate (ethics) policy as well as an issue of public policy given that layoffscan impose substantial costs on former employees, their families and communities. It issuggested that a role for government in that matter may be to help firms internalise the socialcosts of layoffs, without causing large inefficiencies, by raising the unemployment-insurance

premiums on profitable companies that engage in them and cutting premiums in companiesthey don not. Alternatively, if the society wants companies to take on the responsibility offinding new jobs for employees who are no longer needed, government could offer thesecompanies tax deductions or credits. Generally speaking, the government can be an arbiter of

business responsibility to society through the application of tax incentives or tax credits.

Government can also exercise the arbiter role through regulation and the setting of minimumstandards to help society overcome free-rider problems. Where firms could benefit if all

54 Cadbury A (1992), Report of the Committee on the Financial Aspects of Corporate Governance, Gee,London.55

Corporate Culture and Good Corporation (2002), Profiles of Codes and Frameworks, London.56 Reich R B (1998), The New Meaning of Corporate Social Responsibility, California Management Review,Vol 40, No 2, pp8-17.


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trained their employees in skills applicable to entire industry or beyond, but no companywould do training unless others did it as well, the government can impose a requirement thatall firms contribute a small percentage of their payrolls to non-firm specific training, or

provide tax incentives for employee training in general (Reich, 1998).

This view of government as arbiter of business responsibilities to society is reinforced byanother argument that sees government as helping business to achieve corporate socialresponsibility though regulation, control and enforcement. This view is driven fromexperience in Scandinavia countries where the control/enforcement model is used toeliminate the problem of cost externalisation.57

Five possible ways/models of avoiding cost externalisation are identified:

x deregulation model: deregulation and viewing the company responsibility as directedtowards the shareholders only;

x corporatist model: providing management with more discretion to take non-profit goalsinto account;

x control of management by an independent body: giving shareholders only an economicrig

Corporate Social Responsibility a Role in Government Policy and Regulation

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